Russia pushes ahead with ruble free float plans

A woman stands under a board listing foreign currency rates against the Russian ruble just outside an exchange office in central Moscow, on January 31, 2014 (AFP Photo/Kirill Kudryavtsev)

Moscow (AFP) - Russia's central bank announced Monday it would intervene less in the foreign exchange market to support the ruble as it works toward letting the currency float freely by the end of the year.

Despite considerable turbulence in the markets due to the crisis in Ukraine and Western sanctions against Russia, the central bank said it had widened the range in which the ruble trades freely and that it would no longer intervene to smooth volatility within that range.

It also reduced the amount of its intervention, from $1 billion (747 million euros) to $350 million, before shifting the value of the ruble's trading band.

The Bank of Russia said "the above-mentioned changes are carried out as part of the transition to an inflation-targeting regime," which it noted requires "abandoning any measures to manage the exchange rate".

Most Western central banks set an inflation target and adjust interest rates to try to ensure gradual increases in prices, leaving the currencies to float freely.

"The Bank of Russia plans to complete the transition to a floating exchange rate regime by the end of 2014," it added in a statement.

The central bank added it expected the changes "will not have a significant impact on current ruble fluctuations" given the Russian currency has been trading in the middle of its band.

Analysts at VTB Capital agreed.

The ruble "seems to have found a new equilibrium" around 35 to 36 rubles to the dollar without central bank intervention, they said.

"Therefore, other things being equal, the widening of the non-intervention zone should be neutral for RUB, we believe."

The ruble was showing slight gains in late afternoon trading (1400 GMT) at 36.042 to the US dollar and 48.224 to the euro.

- 'Dirty float' -

The Russian central bank has been gradually reducing its support for the ruble over the past year as it prepares to shift to inflation-targeting.

However, that goal has been vigorously debated because of a 12-percent slump in the ruble's value against the dollar in the past year, which analysts link to both a general economic slowdown and a withdrawal of capital by investors spooked by the Ukraine crisis.

Moscow's annexation of Crimea from Ukraine and tightening Western sanctions have seen the ruble hit record lows against the dollar and euro, and during the month of March alone the central bank spent $22 billion defending the Russian currency.

The ruble has stabilised since and the bank has gradually reduced its intervention in the foreign exchange market to zero in July.

Markets were destabilised again at the end of July by the imposition of the first sector-wide sanctions against the Russian economy, but rebounded when Moscow imposed its own bans on US and EU food products.

To reduce capital flight, support the value of the ruble and limit price increases, the central bank has been gradually raising interest rates since March. The last hike at the end of July of half a percentage point took the rate to 8.0 percent.

VTB Capital analysts said the central bank was likely to keep raising interest rates as it prepares to drop the ruble band, which they said had encouraged speculation.

They said the central bank is likely to "switch to a dirty float regime, with interventions triggered mainly by the volatility and financial stability considerations".

A dirty floating regime, also known as a managed float, is one where a central bank occasionally intervenes to buffer a currency's value when there is an external shock to the economy.

While the forex market has been relatively stable, the Vedomosti business daily reported on Monday that Russian banks are having trouble attracting dollars.

US financial sanctions are targeted against only a handful of Russian banks and firms, but in reality Russian lenders and companies are finding it nearly impossible to borrow abroad.